Small Business Lending
Small businesses are the lifeblood of the United States economy, as well as employing more American’s than any medium or large sized business – and continuously decreasing the unemployment gap. According to the Small Business Administration, there are over 28.8 million small businesses in the United States, which is about 99.7 percent of all United States businesses, that employ more than 56 million employees, or over 48 percent. These numbers are continuously growing, creating more than 1.1 million new net jobs each year – or two out of every three new net job. Not only are United States small businesses vital to job growth, they have also played a huge role in expanding opportunities to women and minorities (statistics are based on the period from 2007 to 2012):
- Women Owned Businesses: In 2012, there were 9.9 million owned women owned businesses, which is a 26.8 percent increase from 2007.
- Hispanic Owned Businesses: In 2012, there were around 3.3 million Hispanic owned companies, up from 2.3 million in 2007.
- African American Owned Businesses: African American owned businesses saw a 34.5 percent increase from 2007 to 2012, leading to over 2.6 million African American owned firms in 2012.
- Asian Owned Businesses: There was a 23.8 percent increase from 2007 to 2012 in Asian owned businesses, leading to a 23.8 percent increase.
- American Indian and Alaskan Owned Businesses: In 2007, there were 236,691 American Indian and Alaskan Owned Businesses in the United States, which saw a 15.3 percent increase by 2012 to 272,919 businesses.
- Native Hawaiians and Pacific Islander Owned Businesses: Hawaiian and Pacific Islander owned businesses saw a 45.3 percent increase from 2007 to 2012, resulting in 54,749 businesses.
- Veteran Owned Businesses: In 2012, there were 2.5 million veteran owned companies in the United States – a 3 percent increase from 2007.
Small businesses are incredibly vital to the United States, and many American entrepreneurs are becoming more interested in contributing to this area of the economy every single day. Unfortunately, access to capital and alternative funding are still difficult to obtain, mainly in part to the Great Recession, resulting in too many important small businesses being unable to make necessary business moves or to those small businesses simply failing. More discouraging statistics also show that financing for women and minority owned businesses is even harder to come by – and if you are a minority and women owned business, financing options seem almost obsolete.
Loans and Financing for Small Businesses
According to the Small Business Administration, small businesses borrow money for four main reasons: to start a business, to purchase inventory, to expand a business, and to strengthen a firm’s financial foundation. Small businesses account for most of all business borrowing, about 73 percent, because small businesses do not have the same access to capital platforms (i.e. angel investors) and equity based funding that large corporations do.
The National Small Business Association has shown a direct correlation between a small business owner’s ability to hire new or more employees, expand a business, or increase inventory to meet demand and his or her ability to obtain financing. When combining all of the information discussed thus far, it would only make sense to assume that small business owners are faring well when trying to obtain funding to keep the vital economic business afloat, but unfortunately, this is not necessarily the case for most businesses – especially because a majority of the businesses are minority and women owned businesses. Lack of access to adequate financial services has resulted in 41 percent of small businesses unable to grow their business, with 20 percent having to reduce employees due to tight credit constraints.
The National Small Business Association has also shown in their Mid-Year Economic Report for 2016 that there was a 4 percent drop from six months ago when small businesses in the report were asked if they felt they had adequate access to financing. While plenty of small businesses are still relying on some form of bank loans (around 31 percent), more and more small business owners have been turning to credit cards (31 percent), friends or family (17 percent) and Small Business Administration loans (3 percent). The overwhelming amount of small business owners turning away from traditional bank lending options and the decrease in small business owners having access to these loan services is still greatly affected by two areas: the still recovering Great Recession and gender and minority financing gaps, which is evident in the Year to Date (YTD) SBA Business Loan Approval Activity Comparisons Report that will be discussed in greater detail below.
Recovering from the Great Recession and Economic Uncertainty
The Great Recession has had one of the longest economic recovery periods of any other recession, and the proof is obvious when looking at financing for small businesses throughout the United States. While funding conditions have definitely improved since 2008, small business lending has yet to return to pre-recession levels. Unfortunately, the Great Recession left many small business owners with poor credit when trying to keep their businesses afloat during that brutal time. This has ultimately fueled the difficulties faced by many small business owners today when trying to obtain adequate financing. After the brunt of the recession, many large banks stopped loaning to a majority of small businesses because banks decided to focus more on profitable market segments that large corporations were a part of.
Even though obtaining conventional finance choices for small businesses rapidly declined due to the recession, the SBA and alternative online lending platforms decided to play a revolutionary role in closing the credit gap issue for small business owners everywhere. When reviewing the loan approval activity by the Small Business Administration, the increase in loans since 2012 is giving many small business owners hope. In 2012 for the most popular SBA loan option – 7(a) – there were 3,228,388,500 loans approved. By the end of 2016, there were 5,613,254,900 SBA 7(a) loans approved. Unfortunately, for the SBA 504 loan choice, there were 1,118,198,000 approved in 2012, and only a slight increase to 1,131,488,000 by the end of 2016, which is actually slightly down from 2015. The Small Business Administration has played a vital role, in combination with online lending platforms, in helping the underserved small business community, and in the past several years, the Small Business Administration has taken, and continues to take, major strides in combating women and minority owned small business financing gaps.
Funding Gaps for Women and Minority Owned Small Businesses
There are many factors that influence obtaining a loan for a small business, and while lenders are not allowed to make loan decisions based on racial, ethnic, and gender biases, this is still the overwhelming fear of women and minority owned small businesses. Unfortunately, the fear of applying for traditional financing for these business owners has left a huge gap in the amount of people applying for funding that they desperately need – and when they do apply, loan approval rates are much lower than for white males. According to the SBA’s Loan Approval Activity Rate Report, small businesses that were more than 50 percent owned by a woman only received 15 percent of all SBA 7(a) loan approvals; American Indian owned businesses received 1 percent; Asian owned businesses received 24 percent; African American owned businesses received 2 percent; Hispanic owned businesses received 6 percent; White owned businesses received 53 percent; and male owned businesses received 70 percent of all SBA 7(a) loan approvals.
There are many factors that play into financing, including the fact that many woman and minority owned businesses simply do not apply for traditional funding. When comparing rates from 2012, there have been significant increases in SBA lending for women and minority owned businesses, but it does not stop there. Small business owners of all genders, races, and ethnicities must be working with organizations and alternative resources to find the best possible funding option for their business needs.
